50 Economics Ideas You Really Need to Know (50 Ideas) by Conway Edmund

Author:Conway, Edmund [Conway, Edmund]
Language: eng
Format: mobi
Publisher: Quercus
Published: 2009-09-02T23:00:00+00:00

the condensed idea

The irreplaceable foundations of society

timeline

AD 529 Byzantine Emperor Justinian lays down the foundations of modern civil law in his Corpus Juris Civilis

1100–1200 Common law system originates in medieval England

1700–1800 Commercial law starts to be written into national law systems

late 1900s Creation of the European Union establishes new layer of law in Europe

26 Energy and oil

All kinds of commodities matter to the global economy. Without steel or concrete the world’s construction industries would grind to a halt, while the electrical grids that give us our power supply are dependent on copper wire. However, no commodity has been as important – or occasionally as troublesome – over the past century as crude oil.

Three times in the past fifty years oil prices have jumped sharply, pushing up the cost of living significantly throughout the developed world. The first two price rises happened for largely political reasons, while the third was chiefly due to economic forces, but each time the price spike forced politicians to ask searching questions about humankind’s complex relationship with its sources of energy.

This relationship is hardly a new one. Since prehistoric times people have used natural resources to enhance their existence – first through the burning of wood and peat for survival. Then, in the Industrial Revolution, coal was burnt to produce steam power. In the 20th century, other carbon-based fossil fuels (so called because they come from the fossilized remains of dead plants and animals in the earth’s crust) such as oil and natural gas became key sources of energy. So ingrained has the use of petroleum-based products become in modern society that it is easy to forget there would be no cars or air travel without them, and the vast majority of our power stations would close down. But nor is oil used only for energy; 16 per cent of our usage goes into making plastics, together with various pharmaceuticals, solvents, fertilizers and pesticides.

No ordinary commodity

Like other commodities, such as corn or gold, oil (and natural gas, which is closely related and behaves in a similar way) is an asset that can be traded on a futures market (see Risky business), and its price goes up and down when supply and demand rise and fall. However, energy commodities are different for two main reasons.

First, energy is so important to the functioning of a state that politicians tend to view energy security as a matter of national security, and when politicians get involved in something then the usual assumptions about supply, demand and price tend no longer to apply.

Second, it is only in recent years that energy prices have started to reflect the long-term costs to society of pollution. Burning fossil fuels emits a cocktail of gases, which most scientists believe are directly linked to global warming. Such indirect repercussions of an activity, where people can cause harm or expensive damage to innocent bystanders without having to pay or answer for it, are something economists call ‘externalities’ (see Environmental economics).

OPEC and the first two oil crises Although

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